Sainsbury’s offers £1.3bn for Argos owner Home Retail Group

2nd February 2016

Sainsbury’s has offered £1.3bn in a bid to takeover Argos owner Home Retail Group.

The supermarket giant revealed that a bid it made last year was rejected, but today’s proposal sees it offer equivalent of 161.3p a share. According to the BBC, the offer represents a 63% premium to Home Retail’s share price on 4 January.

The deal is dependent on the sale of Home Retail Group’s DIY chain, Homebase, to Australian company, Westfarmers, for £340m

A partnership between Sainsbury’s and Home Retail Group has already tested appetite for a combined business model, with a number of Argos concessions in supermarket stores.

The takeover would see Sainsbury’s move more Argos branches into its stores as their leases expire as well as the supermarket’s clothing and homeware brands sold in Argos.

It says the deal would create “a food and non-food retailer of choice for customers”.

John Rogers, chief financial officer at Sainsbury’s says he is confident shareholders in both companies will back the offer.

He estimates there would be at least £120m of annual savings by 2019, although the restructure would cost £140m in the first three years.

Home Retail shares, which had traded at about 100p before the approach by Sainsbury’s, fell 0.4% to 152.3p on Tuesday, while Sainsbury’s rose 1.6% to 248.6p.

Helal Miah, investment research analyst at The Share Centre, says: “The announcement this morning did not come as too much of a surprise as the deadline approached, and Home Retail’s shares jumped yesterday. The two high street giants will be hoping that together they can fend off increasing competition from the likes of Amazon, which is constantly expanding and mulling a move into the food business.

“Home Retail have accepted the part cash and shares offer which values each Home Retail share at 161.3p based on Sainsbury’s close price yesterday. However, some Sainsbury’s shareholders may question the 63% premium paid. Home Retail has struggled in recent years, with sales barely showing any growth. Just like the supermarkets, Argos has faced tough competition lately – not just from high street retailers but also from internet sales.

“The rationale behind the deal is to enhance Sainsbury’s multi-channel capabilities including their digital, delivery and retail space opportunities. It is hoped that it will deliver material cost synergies, estimated to be at least £120m in the third year. A number of Argos stores will be run as concessions within Sainsbury’s stores, while Sainsbury’s non-food items such as clothing will be sold in Argos stores. These cross-selling opportunities should also expand the click and collect services that they offer.

“We continue to rate Sainsbury’s as a ‘buy’ for contrarian investors willing to accept a medium level of risk.”